Super funds to face 'uncomfortable' scrutiny

Superannuation funds are set to receive much more scrutiny of their investment returns and fees as the Productivity Commission ramps up its review of efficiency within the system, warns Rice Warner.

Commenting on the release this week of the Productivity Commission's draft report into the competitiveness and efficiency of the superannuation system, Rice Warner said funds will soon face much greater scrutiny.

The draft report, titled How to Assess the Competitiveness and Efficiency of the Superannuation System, was commissioned by Treasurer Scott Morrison in response to the finding of the 2014 Financial System Inquiry (FSI) that there is a lack of "strong price-based competition" in the superannuation system.

Advertisement

Advertisement

The FSI recommended that a new system of allocating default fund members into MySuper products be established unless "a review by 2020 concludes that the Stronger Super reforms have been effective in significantly improving competition and efficiency in the superannuation system".

In February 2016, the Treasurer asked the Productivity Commission to conduct a study in two parts: to develop criteria to assess the efficiency and competitiveness of the super system (ie, the draft report released this week), and to develop alternative models for a formal competitive process for allocating default fund members to products.

In the draft report, the commission sets out a number of system-level objectives for the superannuation system that will be measured for competitiveness and efficiency.

These include maximising net returns; meeting member preferences and needs; providing insurance that meets members' needs at least cost; complementing a stable financial system; and competition that drives efficient outcomes for members.

According to Rice Warner, the Productivity Commission will be relying "heavily" on benchmarks over time to test the performance of superannuation funds against these benchmarks.

"Elements of the benchmarks may be an issue for superannuation funds of all types and sizes," Rice Warner said.

"The Commission rightly identifies the key matters for members to be investment returns and fees and its emphasis will be on measuring these with a view to putting pressure on improving outcomes in these areas.

"We expect that many small funds will find the scrutiny here to be uncomfortable," said Rice Warner.

The Productivity Commission also found that larger superannuation funds spend money on areas that promote "unhealthy competition", such as product proliferation and high advertising expenditure.

Given the complexity of the superannuation industry it will be "useful" to see the development of "robust measures of efficiency", said Rice Warner.

"This should lead to some rationalisation as the funds delivering poorer performance will be taken over.

"It would be a good sign if industry-wide fees started to plateau even as the asset base rises. Then, all members would get better value for money," Rice Warner said.